Priceless Ventures
How the era of money printing devalued risk, depressed innovation and hypenotized us all
Recently, I was sitting with an established professor at a top-tier business school who also doubles as a corporate advisor. One of his clients was a company on the rise at the forefront of innovation. “The CEO inspires me. He really thinks big.”
I had now gotten used to the narratives around saving the world (see: Billions & Billionaires). But I was not ready for what I heard next: “The company is barely a decade old, but he has a vision: to make it a trillion-dollar company, the first in its industry. Amazing.” Ah - the vision! The aspiration!
Maybe it was better to try to save the world after all?
Over the last decade, we have had one iconic poster child of excess after another. Adam Neumann. Elizabeth Holmes. Sam Bankman-Fried. Predators purveying returns to the world of money, siphoning whatever capital they could come across. They were all also repped by hype men making introductions. Masayoshi Son. Henry Kissinger. Anthony Scaramucci.
Noted philosopher Marshall McLuhan famously said that the medium is the message. The means is ultimately the end. In this case, the money becomes the be-all and end-all. In a deeply cynical time of rising inequality amidst monetary abundance, everyone needs to get theirs because if you don’t go get it, someone else will. The tragedy of the commons, except with the world’s money supply, and driven by ubiquity rather than scarcity. Founders are not building a company but a money engine.
There can indeed be too much of a good thing. The last decade of money printing led to the near absolute financialization of the technology sector and research & development overall, undermining the natural scale and potential of American innovation – the traditional heartbeat of the American economy. By reducing, if not eliminating, the price of risk entirely, it opened the door for the worst of the Ponzis, the lowest of the scammers, and worst of all – traditional wall street.
Venture capital today is bloated, big tech is oversupplied, and the hype train continues, now riding the AI locomotive. Like a giant vacuum, every brilliant idea is sucked in and turned into a SaaS or perhaps unintentionally a WMD. A course correction is possible, but it will take a re-orientation in a society that has lost trust and puts money on the highest pedestals. Asking for martyrs in a time of excess will not work. But a value-based movement needs to return if innovation is truly to be transformative once again.
Money, Money, Money
If you didn’t make it to a crypto party in 2020 and 2021, I feel for you. Did you get to Burning Man in the 2010s? What about a luxury Ayahuasca retreat in Costa Rica recently? Perhaps you can keep an eye out for an AI party in Vegas soon on the sidelines of the inaugural Formula 1 race in a few months?
After 2008, America’s most recent pump-and-flip industry, real estate, could no longer sustain excesses in the spotlight (obviously, the party continued in the shadows). However, post the GFC, the money printers were still on overdrive. It was time for big money to flow across new tributaries to the lake of technological wonder. Microsoft and Apple were by now stalwarts. Amazon was a rising member of the establishment. And Google and Facebook were being courted to join the other side of the shore, leaving Gatsby behind. Of course, there was so much money sloshing around that it couldn’t just accumulate in existing companies. Cue the subsidized sharing economy! Investing became a stand-in for gambling. Although if you could rig the casino and the house was in cahoots with you, wouldn’t you do it – and was it really gambling?
Risky ventures with long tails would be of no interest to investment firms with impatient shareholders. Why wait ten years for returns? I want my returns, and I want them now! No need to IPO; just keep circling rounds at higher valuations. Ultimately, it became a loop of JP Morgan & friends with money from the treasury, cycling it through their clients onto tech firms in private circle rounds that marked higher valuations, creating book value for asset holders, who could borrow against it, put that cash into hard assets (like real estate in the shadows) and keep the wealth transfer going until the printers finally stopped in 2022.
I can’t think of a more value-less economy than the last ten years [of course, there’s an economist out there with a detailed comparative chart providing a counter-factual].
Riskless Business
Money in 2023 now costs money. Risk is actually priced, and we are now seeing the fallout. SVB, FRB, Credit Suisse, PacWest, First Horizon – just the beginning. Commercial real estate? Yikes! There is much more left to unfold, but that will take a separate post.
Many businesses became truly riskless in the last decade. Profit-seeking was replaced by growth-seeking. In its IPO in 2019, Uber explicitly stated that costs “will increase significantly in the foreseeable future” and “may not achieve profitability” ever. When did capitalism become socialism for wealthy start-ups and their investors? In 2009, that’s when. If you throw billions of dollars at creating convenience for the white-collar class, which now is in the tens of millions, there will be some positive results with seeming public support.
You can take Uber when you land somewhere (although it’s quite expensive). You can rent a room anywhere in any city on Airbnb (although it’s less straightforward than a hotel). You can watch content on so many different platforms (although it’s probably easier and healthier to go for a walk outside).
Check out Yahoo Finance’s summary of the most innovative companies founded in the 2010s. They don’t seem all that innovative or value-creating –, but they did facilitate convenience at scale through financing for the white-collar class.
When you think of the companies that fundamentally grew to become the largest globally since 2009, they had created viable business models by 2009: Facebook, Google, Amazon, and Netflix –joining stalwarts from the two decades prior, such as Microsoft and Apple. These companies were already resilient and used the post-GFC period to build incredible war chests.
Technology and venture went from the exotic periphery to the mainstream. FAANG+M swallowed the ecosystem with massive cash piles, short-cutting organic growth, and the evolution of many companies. Forty percent of the S&P 500 is tech-related, but half of that, 20%, is represented by Apple, Microsoft, Amazon, and Alphabet soup. At the peak of the hyper-tech bubble in 2000, the tech sector only reached 35%.
The race in the 2010s ultimately went from innovation and disruptive business models to exits and headlines. Was success what you invented and what you created, or that you became a circle round unicorn? We went from 30-40 unicorns in 2013 to over a thousand by 2022. Most of them fake. In a riskless business environment, debt is king, value, and profit generation are not. Financializing assets is. And technology essentially became a financialized asset. Why invest for 10-year returns that may not happen when you can get guaranteed 5x returns in 2 years? And by the way, that business never needs to make a profit!
Innovation De-cycled
Many would posit that an era of free money would lead to businesses everywhere, start-ups being funded, and innovation on supercharge. Not true.
The above chart shows what happened in the decade after the GFC, with company closures rising and those starting up staying static. Where did the money go? To elite pools of capital, of course! Anecdotally there are successes. And there are counter-cyclical examples like Tesla and SpaceX (founded, by the way, before the GFC). It’s also unclear that excess money helps secondary followers in innovative sectors. Look at Rivian, for example, which continues to fail through its bloat.
Innovation can be de-cycled when there is unlimited financialization of the innovation economy. That is precisely what happens as incentives are perverse and business value is devalued. For larger pools of capital in a financialized economy expecting immediate returns, why bleed your money into R&D when you can buy it? This is a consistent trend over not just the last decade but the last several decades.
What are we to make of all the talk about Web3, AI, and the metaverse? Ultimately, the hyper-hype moment of 2020-2022 around Web3 clearly showed that when lots of riskless money is printed, it does not flow to value-generating businesses with long-term innovation cycles but most often to slip-slop, slap-dash, flip-flop SBFs and FTXs, with a sprinkle of Doge thrown in. There are 8 billion humans. So yes, innovation continued, there were great start-ups, and incredible technology was developed.
But in many ways, most innovation was under-potential, counter-cyclical, and moving against resistance. It also comes at a time when disruptive science is falling overall (another topic to be explored in greater depth).
Historical Values
Money is not the most significant incentive or value driver for innovation. What?!
Alexander Fleming. Frederick Banting. Albert Einstein. John Nash. Marie Curie. Or further back, Isaac Newton and Ibn Sina. Not one of these individuals was on the Forbes 40 under 40 list. At least, last time I checked. They revolutionized the world. Transformed entire scientific fields. Reshaped economies. Saved millions of lives. Imagine them emerging today. They would be tapped to lead a Hoffman-backed startup on HR Saas and then placed with crossed arms on the cover of Forbes that would double as a viral LinkedIn post. Earlier in the decade, Einstein probably would have been set up on a blind date with Elizabeth Holmes at the Met Gala only to sit at a table with JP Morgan’s Jes Staley, who would offer to introduce them to Jeffrey Epstein.
This is about a decline in step-change scientific breakthroughs but also the realization of genuinely transformative industrial achievements. On the latter, Musk may be succeeding. On the former, CRISPR (genome editing) is something new. But how did CRISPR take off? Was it a start-up? Was it inside an MNC? Were the innovators on a get-rich-quick scheme in cahoots with a16z? No, ultimately, in 2012, when Jennifer Doudna and Emmanuelle Charpentier made some of their critical discoveries around genome editing, they were at UC Berkeley. A separate team with similar results was at MIT. Obviously, since it was the 2010s, they were subsumed slightly by a strain of venturitis.
What does this all mean? When Microsoft was at its previous zenith, the media portrayed it as an evil force, governments took anti-trust action, and coders everywhere sought to democratize technology. Linux was the answer from the technology community. An operating system for everyone! GitHub launched several months before the GFC, has since become the world's largest (open) source code repository. And, of course, there’s Bitcoin which grew out of collaborative conversations to democratize financial technology.
Is public open access less effective at fostering innovation compared to legally enforced monopolies that accumulate capital? The history of innovation at universities would tell us the opposite. And in times of ubiquitous capital, it’s clear that openness and sharing are deprioritized and collaboration reduced in the innovation ecosystem.
There is, however, something else also going on. People are driven by values, and in a world and West where there is less of a sense of belonging, other markers of respect and contribution simply won’t motivate to the same degree that they did in decades past. The below chart from the Wall Street Journal is stark. Less than five years ago, patriotism, religion, having children, and community involvement were ALL viewed as more important than money. Today, money trumps them all.
When OpenAI was founded as a non-profit collective to develop AI responsibly, it stood no chance in this environment to remain so. It was quickly privatized and financialized and is already a SaaS.
Moving Beyond the Hype
When there is hype at hypnotic levels, it can cause us to lose sight that some incredible things are happening. We are at a half-century zenith of the microprocessor, and it has unlocked technological capabilities we could never have imagined. Countless young people are thinking about an entrepreneurial journey, and Generation Z, much maligned in the mainstream, is full of imaginative creators like no generation before it. The accessibility of AI could radically remake what we think is possible and facilitate step-change innovation – beyond what we saw in the 20th century.
Yet, if you are a country looking at fostering innovation, a company looking to be innovative, or an investor or technologist seeking to back transformative innovation, the hype model from the 2010s needs to be rethought. Even if you are a short-termer or a gambler on Wall Street with a fixed house, the money printer today is far more selective and vindicative (see SVB).
Is it important to go to Mars because it will make a lot of money? Should we figure out how to decentralize energy grids because it will cascade to a better balance sheet for Blackrock? Is it more motivating to develop an AI health SaaS than AI diagnostics that never enters healthcare inc?
It is not about replacing capitalism with communism, but what exists today is elite socialism in a society that’s unmoored, with innovation precluded from reaching its full potential.
To be fair, OpenAI was a fascinating experiment, bringing multiple technologists under one roof. It encouraged collaboration and had significant capital.
We need more of that.
Perhaps Elon Musk could start again where his heart truly lies and create 0penSpace.